RITES (NSE:RITES) Is Due To Pay A Dividend Of ₹5.00

The board of RITES Limited (NSE:RITES) has announced that it will pay a dividend of ₹5.00 per share on the 12th of October. This means the annual payment is 2.7% of the current stock price, which is above the average for the industry.

See our latest analysis for RITES

RITES' Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, RITES' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 147% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

Over the next year, EPS is forecast to expand by 80.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 62%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

RITES' Dividend Has Lacked Consistency

Looking back, RITES' dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. The annual payment during the last 6 years was ₹5.32 in 2018, and the most recent fiscal year payment was ₹18.00. This works out to be a compound annual growth rate (CAGR) of approximately 23% a year over that time. RITES has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend's Growth Prospects Are Limited

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Although it's important to note that RITES' earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The track record isn't great, and the payments are a bit high to be considered sustainable. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for RITES that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.